Diversity and Economic Performance in a Model with Progressive Taxation

Wang, Wei and Suen, Richard M. H. (2018): Diversity and Economic Performance in a Model with Progressive Taxation.

Abstract

Is a more heterogeneous population beneficial or harmful to long-term economic performance? This paper addresses this and other questions in a dynamic general equilibrium model where consumers have different labour productivity and time preference. We show how differences in the cross-sectional distribution of these characteristics can affect the economy via two channels. The first one involves changing the composition of the labour force; and the second one involves changing the cross-sectional distribution of marginal tax rate. We show how these channels are, respectively, determined by the shape of the labour supply function and the curvature of the marginal tax function.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer Heterogeneity, Progressive Taxation, Endogenous Labour Supply
• Subjects: D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

Ager, P., and Brückner, M. (2013). "Cultural Diversity and Economic Growth: Evidence from the U.S. during the Age of Mass Migration." European Economic Review, vol. 64, pp.76-97.

Alesina, A., and La Ferrara, E. (2005). "Ethnic Diversity and Economic Performance." Journal of Economic Literature, vol. 43, pp.762-800.

Alesina, A., Harnoss, J., and Rapoport, H. (2016). "Birthplace Diversity and Economic Prosperity." Journal of Economic Growth, vol. 21, pp.101-138.

Altonji, J. (1986). "Intertemporal Substitution in Labour Supply: Evidence from Micro Data," Journal of Political Economy, vol. 94, pp.s176-s215.

Angyridis, C. (2015). "Endogenous Growth with Public Capital and Progressive Taxation." Macroeconomic Dynamics, vol. 19, pp.1220-1239.

Becker, R.A. (1980). "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," Quarterly Journal of Economics, vol. 95, pp.375-382.

Bricker, J., Kennickell, A.B., Moore, K.B., and Sabelhaus, J. (2012) "Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, vol. 98, pp.1-80.

Bricker, J., Dettling, L.J., Henriques, A., Hsu, J.W., Jacobs, L., Moore, K.B., Pack, S., Sabelhaus, J., Thompson, J., and Windle, R.A. (2017) "Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, vol. 103, pp.1-42.

Carroll, D.R., and Young, E.R. (2009). "The Stationary Wealth Distribution under Progressive Taxation." Review of Economic Dynamics, vol. 12, pp.469-478.

Carroll, D.R., and Young, E.R. (2011). "The Long Run Effects of Changes in Tax Progressivity." Journal of Economic Dynamics & Control, vol. 35, pp.1451-1473.

Collier, P., and Gunning, J.W. (1999). "Explaining African Economic Performance." Journal of Economic Literature, vol. 37, pp.64-111.

Conesa, J.C., and Krueger, D. (2006). "On the Optimal Progressivity of the Income Tax Code." Journal of Monetary Economics, vol. 53, pp.1425--1450.

Correia, I. (2010). "Consumption Taxes and Redistribution," American Economic Review, vol. 100, pp.1673-1694.

Datta, M., Mirman, L.J., and Reffett, K.L. (2002). "Existence and Uniqueness of Equilibrium in Distorted Dynamic Economies with Capital and Labor," Journal of Economic Theory, vol. 103, pp.377-410.

Easterly, W., and Levine, R. (1997). "Africa's Growth Tragedy: Policies and Ethnic Divisions." Quarterly Journal of Economics, vol. 112, pp.1203-1250.

Erosa, A., and Koreshkova, T. (2007). "Progressive Taxation in a Dynastic Model of Human Capital." Journal of Monetary Economics, vol. 54, pp.667-685.

Frederick, S., Loewenstein, G., and O'Donoghue, T. (2002). "Time Discounting and Time Preference: A Critical Review." Journal of Economic Literature, vol. 40, pp.351-401.

Gouveia, M., and Strauss, R.P. (1994). "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis." National Tax Journal, vol. 47, pp.317-339.

Greenwood, J., Hercowitz, Z., and Huffman, G.W. (1988). "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, vol. 78, pp.402-417.

Guo, J.T., and Lansing, K.J. (1998). "Indeterminacy and Stabilization Policy." Journal of Economic Theory, vol. 82, pp.481-490.

Huggett, M., Ventura, G., and Yaron, A. (2011). "Sources of Lifetime Inequality." American Economic Review, vol. 101, pp.2923-2954.

Jaimovich, N., and Rebelo, S. (2009). "Can News about the Future Drive the Business Cycle?" American Economic Review, vol. 99, pp.1097-1118.

Keane, M.P., and Wolpin, K.I. (1997). "The Career Decisions of Young Men." Journal of Political Economy, vol. 105, pp.473-522.

King, R.G., Plosser, C.I., and Rebelo, S.T. (1988) "Production, Growth and Business Cycles: I. The Basic Neoclassical Model," Journal of Monetary Economics, vol. 21, pp.195-232.

Li, W., and Sarte, P.D. (2004). "Progressive Taxation and Long-Run Growth." American Economic Review, vol. 94, pp.1705-1716.

MaCurdy, T.E. (1981). "An Empirical Model of Labor Supply in a Life Cycle Setting," Journal of Political Economy, vol. 89, pp.1059-1085.

Nourry, C. (2001). "Stability of Equilibria in the Overlapping Generations Model with Endogenous Labor Supply," Journal of Economic Dynamics & Control, vol. 25, pp.1647-1663.

Ottaviano, G., and Peri, G. (2006). "The Economic Value of Cultural Diversity: Evidence from U.S. Cities." Journal of Economic Geography, vol. 6, pp.9-44.

Padovano, F., and Galli, E. (2001). "Tax Rates and Economic Growth in the OECD Countries (1950-1990)," Economic Inquiry, vol. 39, pp.44-57.

Sarte, P.D. (1997). "Progressive Taxation and Income Inequality in Dynamic Competitive Equilibrium." Journal of Public Economics, vol. 66, pp.145-171.

Shaked, M., and Shanthikumar, J.G. (2007). Stochastic Orders. Springer.

Suen, R.M.H. (2014). "Time Preference and the Distributions of Wealth and Income," Economic Inquiry, vol. 52, pp.364-381.

Trax, M., Brunow, S., and Suedekum, J. (2015). "Cultural Diversity and Plant-Level Productivity." Regional Science and Urban Economics, vol. 53, pp.85-96.